Receiver Report
Securities America Knew About MedCap Risks
27/01/10 20:29
After a period of relative quiet, as the Receiver continued to post his monthly reports concerning the increasingly dim prospects for recovery from Medical Capital’s assets, a flurry of news is currently being released. The State of Massachusetts has filed a Complaint against Securities America related to the sale of the Medical Capital notes. The Complaint contains a wealth of information regarding Securities America’s alleged knowledge of risks related to Medical Capital - risks that were not shared with the investors.
Stepping back for a moment, it is important to acknowledge that the Receiver’s January report took a large step forward in his finding that none of the individual Medical Provider Funding special purpose corporations had funds sufficient to satisfy their investors. Accordingly, funds had to be shifted between the various entities in order to satisfy the investors. This is, at heart, the description of a Ponzi scheme. If Medical Provider Funding I has cash flow that was insufficient to satisfy the investors, then monies from Medical Provider Funding II were shifted to pay the MPF I investors. And so it went - right through Medical Provider Funding VI. We expect the Receiver to continue to report his findings on that subject as his investigation continues.
Given the Receiver’s comment that “no MPFC ever generated enough profit to pay its investors’ principal and interest” in mind, we turn to the information attached to the Massachusetts Complaint. The documents attached to the Complaint evidence a situation in which Securities America’s due diligence examiner continued to raise red flags and suggest disclosures to the investors. But all of the recommendations fell upon deaf ears. In 2005, the independent third party due diligence firm hired to review Medical Capital III found a host of issues:
1. The Note Agreement did not require a sinking fund for payment of the Notes or require the maintenance of any particular financial ratios to better ensure future repayment of the Notes;
2. The ability of MPFC III to invest up to $50,000,000 in equity securities of all types of businesses and make mortgage loans to receivables sellers or other parties in the health care industry, outside of MCC core expertise (the analyst also found that the MPFC III private placement memorandum contained inadequate disclosures regarding mortgage financing, conflicts of interest as dual lender and commercial real estate risks);
3. The lack of independent directors, especially given the myriad of related and conflicted transactions and contractual relationships by and among the Company, MCC, MCH and MediTrack;
4. The executives of MCC, Mr. Field and Mr. Lamparielleo, had not agreed to personally certify monthly net collateral coverage and with individual indemnity directly to Noteholders;
5. The weakened role of the trustee, evidenced by a diluted Note Agreement with Wells, including the lack of a disbursing agent function, a higher 50% threshold for Noteholders to enforce remedies, and the general lack of responsibility and oversight that was incorporated in prior offerings;
6. Given the burgeoning size and presence of MCC and the special purpose entities and the dollars involved, the use of a local CPA firm rather than one of the nationals; and
7. The ability of MPFC III to purchase receivables that were aged greater than 180 days, which was inconsistent with MCC’s prior strategic approach of buying quality insurance company and government receivables, which “turn” every 90 days.
The same issues were raised concerning MPFC IV in 2006, and regarding MPFC V in 2007. Obviously, these concerns were never brought to the investors’ attention, and no paperwork was ever presented to investors concerning these material risk factors. Nor was the Private Placement Memorandum amended to address the mortgage financing, conflicts of interest and commercial real estate risks.
Another nagging issue was the lack of audited financials. The issue was important enough to capture the attention of Securities America’ President and voting member of its due diligence committee:
The audited financials were never obtained. It seems that there was no drop-dead date. And it seems that Securities America continued to offer the securities. If Securities America had concerns, the profit reaped from the massive sales seems to have quieted those nagging doubts.
So why wasn’t anything done? Why were no risk disclosures made? Why was this investment pushed the way it was? Perhaps the answer can be found in a November, 2006, email from the due diligence officer to Medical Capital: “I could go on and on but if you guys figure ‘the money keeps rolling in, why do anything?’, then that’s certainly your business decision.” This email was copied to the Chairman of Securities America’s Due Diligence Committee. The business decision was undoubtedly made: commissions trump adherence to fiduciary duty.
If this isn't how you expected your Medical Capital investment to work, call us at 888 999 9396, or send an email.
If you would like to read older posts, please click on the archive links to the right. To return to this entry, hit the “back” button on your browser.
Stepping back for a moment, it is important to acknowledge that the Receiver’s January report took a large step forward in his finding that none of the individual Medical Provider Funding special purpose corporations had funds sufficient to satisfy their investors. Accordingly, funds had to be shifted between the various entities in order to satisfy the investors. This is, at heart, the description of a Ponzi scheme. If Medical Provider Funding I has cash flow that was insufficient to satisfy the investors, then monies from Medical Provider Funding II were shifted to pay the MPF I investors. And so it went - right through Medical Provider Funding VI. We expect the Receiver to continue to report his findings on that subject as his investigation continues.
Given the Receiver’s comment that “no MPFC ever generated enough profit to pay its investors’ principal and interest” in mind, we turn to the information attached to the Massachusetts Complaint. The documents attached to the Complaint evidence a situation in which Securities America’s due diligence examiner continued to raise red flags and suggest disclosures to the investors. But all of the recommendations fell upon deaf ears. In 2005, the independent third party due diligence firm hired to review Medical Capital III found a host of issues:
- They suggested that no retail client should concentrate a material amount of an income-oriented portfolio to this investment.
- They suggested that, before the sale to retail clients, Medical Capital Holding should be required to produce to the investors copies of monthly administrator’s reports so that collateral coverage ratios could be tracked.
- They suggested that retail customers acknowledge, in writing, that they understand the following risks associated with MPFC III (as compared to the prior Medical Capital notes):
1. The Note Agreement did not require a sinking fund for payment of the Notes or require the maintenance of any particular financial ratios to better ensure future repayment of the Notes;
2. The ability of MPFC III to invest up to $50,000,000 in equity securities of all types of businesses and make mortgage loans to receivables sellers or other parties in the health care industry, outside of MCC core expertise (the analyst also found that the MPFC III private placement memorandum contained inadequate disclosures regarding mortgage financing, conflicts of interest as dual lender and commercial real estate risks);
3. The lack of independent directors, especially given the myriad of related and conflicted transactions and contractual relationships by and among the Company, MCC, MCH and MediTrack;
4. The executives of MCC, Mr. Field and Mr. Lamparielleo, had not agreed to personally certify monthly net collateral coverage and with individual indemnity directly to Noteholders;
5. The weakened role of the trustee, evidenced by a diluted Note Agreement with Wells, including the lack of a disbursing agent function, a higher 50% threshold for Noteholders to enforce remedies, and the general lack of responsibility and oversight that was incorporated in prior offerings;
6. Given the burgeoning size and presence of MCC and the special purpose entities and the dollars involved, the use of a local CPA firm rather than one of the nationals; and
7. The ability of MPFC III to purchase receivables that were aged greater than 180 days, which was inconsistent with MCC’s prior strategic approach of buying quality insurance company and government receivables, which “turn” every 90 days.
The same issues were raised concerning MPFC IV in 2006, and regarding MPFC V in 2007. Obviously, these concerns were never brought to the investors’ attention, and no paperwork was ever presented to investors concerning these material risk factors. Nor was the Private Placement Memorandum amended to address the mortgage financing, conflicts of interest and commercial real estate risks.
Another nagging issue was the lack of audited financials. The issue was important enough to capture the attention of Securities America’ President and voting member of its due diligence committee:
My big concern is the audited financials. At this point, there is no excuse for not having audited financials . . . . it is a cost they simply have to bare [sic] to offer product through our channel. We may simply have to tell them that if they don’t have financials by XXXX date we will stop distributing the product on that date. Then they can decide if that is worth spending $50,000 to have it done. If they won’t spend the money, that should give us concerns.
The audited financials were never obtained. It seems that there was no drop-dead date. And it seems that Securities America continued to offer the securities. If Securities America had concerns, the profit reaped from the massive sales seems to have quieted those nagging doubts.
So why wasn’t anything done? Why were no risk disclosures made? Why was this investment pushed the way it was? Perhaps the answer can be found in a November, 2006, email from the due diligence officer to Medical Capital: “I could go on and on but if you guys figure ‘the money keeps rolling in, why do anything?’, then that’s certainly your business decision.” This email was copied to the Chairman of Securities America’s Due Diligence Committee. The business decision was undoubtedly made: commissions trump adherence to fiduciary duty.
If this isn't how you expected your Medical Capital investment to work, call us at 888 999 9396, or send an email.
If you would like to read older posts, please click on the archive links to the right. To return to this entry, hit the “back” button on your browser.
The Receiver's November Report
21/11/09 14:46
The Receiver issued his latest report on November 10. There are no good surprises to be found in the report. Instead, it appears that he's working hard to collect and liquidate assets as best he can. But the results will still likely yield but pennies on the dollar for the Medical Capital investors.
Highlights of the report include:
The conclusion to be drawn from the latest report is simple: it doesn't matter how terrific a job the Receiver does, he can only work with what he has. He's indicated that Medical Capital owes $1 Billion to its investors. The company’s books show a total asset base of $1.1 Billion. But of that sum, $542 Million of assets don't exist. That leaves, at best, $552 Million in assets to be liquidated. If history is a guide, we can expect the Receiver to collect half of that sum, or less, on a gross basis. The payment of his fees, professional fees and expenses will leave a modest sum for the investors.
If this isn't how you expected your Medical Capital investment to work, call us at 888 999 9396, or send an email.
If you would like to read older posts, please click on the archive links to the right. To return to this entry, hit the “back” button on your browser.
Highlights of the report include:
- He collected almost $20 Million in cash since he was appointed. He has spent almost $3 Million for the operating expenses of the receivership estate. No professional fees have been paid.
- He finalized the sale of a retirement/senior living facility, netting $13,753,451.60 of the $25.2 Million due from the company.
- He's trying to sell another medical care facility for a gross of $9.5 Million. The original debt was $36.3 Million.
- The view of the likelihood of the collection of medical accounts receivable - which many investors believed to be the core aspect of Medical Capital's business - hasn't changed. According to the Receiver, "Of the $80,637,383 of real accounts receivable, a mere $6,114,233 are under 180 days old and therefore potentially collectible."
- The infamous yacht, which cost $4.5 Million, is now the subject of negotiations for sale somewhere less than $2.9 Million.
The conclusion to be drawn from the latest report is simple: it doesn't matter how terrific a job the Receiver does, he can only work with what he has. He's indicated that Medical Capital owes $1 Billion to its investors. The company’s books show a total asset base of $1.1 Billion. But of that sum, $542 Million of assets don't exist. That leaves, at best, $552 Million in assets to be liquidated. If history is a guide, we can expect the Receiver to collect half of that sum, or less, on a gross basis. The payment of his fees, professional fees and expenses will leave a modest sum for the investors.
If this isn't how you expected your Medical Capital investment to work, call us at 888 999 9396, or send an email.
If you would like to read older posts, please click on the archive links to the right. To return to this entry, hit the “back” button on your browser.